tokens.html.pm

#lang pollen

◊(define-meta title "Tokens")
◊(define-meta subtitle "Cryptocurrencies with centrally managed supply")
◊(define-meta published "2020-02-07T07:35:36+01:00")
◊(define-meta updated "2021-05-07T19:11:00+01:00")
◊(define-meta uuid "1cbc42c7-a81d-40ff-9620-1d89c13dee12")
◊(define-meta template "chapter.html")

◊(clear-sidenotes)


◊epigraph{
  ◊qt[#:src "Shooter (2007)"
      #:quote-src #t
      #:url shooter]{
    The moment you think you got it figured, you’re wrong.
  }
}

◊(define shooter
   (x-ref
     "2020-02-07"
     "https://www.imdb.com/title/tt0822854/"
     "Shooter (2007)"))

One of the most important properties that let cryptocurrencies function well as money is the limited supply. If someone was allowed to print coins from thin air, it would be very poor money and would essentially be worthless.

But would they really be completely useless? These cryptocurrency-like things are called ◊em{tokens}, and they aren't that useless. In this chapter, we'll look at how they can enable more accessible fund raising, improve gift cards or enable peer-to-peer derivative trading.

◊subhead{What are tokens?}

Tokens are essentially cryptocurrencies, except there's a single entity with the power to create coins. Tokens retain the other useful ◊link[properties_of_a_cryptocurrency]{properties of cryptocurrencies} such as counterfeit resistance, transaction irreversibility and ◊link[double-spending]{double spend protection}.◊sn{weak}

◊ndef["weak"]{
    Some properties are weakened when the value of tokens come from a central party.

    Consider a gift card token for example.  If the company backing the gift card goes bankrupt or if the company declares that the tokens cannot be redeemed, they're now useless.
}

They achieve this by operating on top of an existing cryptocurrency. You might think of it as the issuer marking some coins with additional information, specifying what kind of token they are. (Technically tokens can be implemented in many different ways, but this is the core idea.)

The most popular class of tokens are probably the ◊link[erc20-standard]{ERC20 tokens}, implemented on top of Ethereum. ◊link[usdc]{USD Coin}, Coinbase's stablecoin backed 1-to-1 by USD, is example an ERC20 token. ◊link[bnb]{Binance Coin}, used for the bonus system on the cryptocurrency exchange Binance, is another.◊sn{other-coins}

◊note-pos[#:top -20]{weak}

◊note-pos[#:top -2]{other-coins}

◊ndef["other-coins"]{
    You could implement tokens on other cryptocurrencies as well. The ◊link[omni]{Omni Layer} is for example an extension network built on Bitcoin that supports tokens. The difference is that Ethereum's ERC20 tokens are miner validated, while Omni uses a different consensus mechanism.
}

◊(define brave
   (x-ref
     "2020-02-07"
     "https://brave.com/"
     "Brave Browser"))
◊(define usdc
   (x-ref
     "2020-02-07"
     "https://www.coinbase.com/usdc"
     "Coinbase: USD Coin (USDC)"))
◊(define bnb
   (x-ref
     "2020-02-07"
     "https://coincentral.com/what-is-binance-coin-bnb/"
     "Bennett Garner (2018) What Is Binance Coin (BNB)? | A Guide to the Crypto of the Famous Exchange"))
◊(define omni
   (x-ref
     "2020-02-07"
     "https://www.omnilayer.org/"
     "Omni Layer: An open-source, fully-decentralized asset platform on the Bitcoi Blockchain"))
◊(define erc20-standard
   (x-ref
     "2020-02-07"
     "https://eips.ethereum.org/EIPS/eip-20"
     "Ethereum Improvement Proposals (2015) EIP 20: ERC-20 Token Standard"))


◊subhead{Initial coin offering}

The most famous---or infamous---use of tokens is for an ◊link[ico]{Initial Coin Offering (ICO)}. It's similar to an ◊link[ipo]{Initial Public Offering (IPO)}, which aims to raise funds for companies or projects. In return for giving them money you'll receive a token as a sign of participation. ICOs are mostly unregulated and are easy for anyone to participate in.◊mn{security}

◊ndef["security"]{
    ICOs are classified as securities and the Securities and Exchange Commission (SEC) has intervened on a number of occasions.
}

One of the benefit of ICOs is that they're very easy to setup, and with the right tools it can be done in a few seconds. This is also a downside as there are countless of ICOs that function only as ◊link[pyramid-scheme]{pyramid schemes} with the only purpose of finding ◊link[greater-fools]{greater fools} to dump on.

Although ICOs are mostly associated with scams (and rightfully so I'd say) there might be some usefulness here. What you're really doing is donating money to a cause you believe in, and hope you'll get a good outcome.

◊note-pos[#:top -18]{security}

◊;I'd say the ICO of the ◊link[brave]{privacy focused browser Brave} is an example of a good ICO.

Does it sound insane? That's really no different from how ◊link[kickstarter]{Kickstarter} works, where it's very popular to pledge money for an interesting board game project and you wait for months or years and hope you'll get something in return.◊mn[#:top -3]{insane?}

◊ndef["insane?"]{
    You might still say it sounds insane, but just realize Kickstarter is very popular and it mostly works out well. (At least for board games, which I'm most familiar with.)

  ◊link[flipstarter]{Flipstarter} is a platform that improves on Kickstarter by enforcing payments via smart contracts, cutting out the third-party from the picture. The money is automatically transferred when the funding goal has been reached, but otherwise it never leaves the pledger's wallet.
}

Why would you want a token for this? The benefit would be that anyone, anywhere, could participate and that participation could be done anonymously. And it all takes place on a platform where you have a guarantee that you can sell your token if you lose faith in the project (since properly implemented not even the issuer can prevent token transactions).◊mn{anon}

◊ndef["anon"]{
    It might be hard to claim anonymity if you want someone to send a board game to you, but it's relevant if you're expecting returns in cryptocurrencies or other digital goods.
}

◊(define greater-fools
   (x-ref
     "2020-02-07"
     "https://en.wikipedia.org/wiki/Greater_fool_theory"
     "Wikipedia: Greater fool theory"))
◊(define pyramid-scheme
   (x-ref
     "2020-02-07"
     "https://en.m.wikipedia.org/wiki/Pyramid_scheme"
     "Wikipedia: Pyramid scheme"))
◊(define ico
   (x-ref
     "2020-02-07"
     "https://www.investopedia.com/terms/i/initial-coin-offering-ico.asp"
     "Jake Frankenfield: Initial Coin Offering (ICO)"))
◊(define ipo
   (x-ref
     "2020-02-07"
     "https://www.investopedia.com/terms/i/ipo.asp"
     "Adam Hayes: Initial Public Offering (IPO)"))
◊(define flipstarter
   (x-ref
     "2021-05-07"
     "https://flipstarter.cash/"
     "Flipstarter"))
◊(define kickstarter
   (x-ref
     "2020-02-07"
     "https://www.kickstarter.com/"
     "Kickstarter"))


◊subhead{Gift cards}

People use gift cards all the time, but they're not always that great. How do you verify that they're valid, and haven't already been used? How do you do that in stores, when you're choosing which one to buy, and how do you verify digital gift cards?

For example, let's say you walk into a store and want to buy a gift card. How do you know it's not fake, or haven't been used? Luckily there's a code on the gift card, which you can enter into a website to verify if it's still valid. Okay! It's valid, so you buy it and walk out the store.

Unfortunately for you, the store clerk has already written down the gift card code, and shortly after you leave the store he decides to use it up, making your gift card useless. Physical gift cards, the one you hand in to a store when you use them up, don't really have this problem, but this is unsolved for digital gift cards.◊mn{verify}

◊ndef["verify"]{
    Physical gift cards can have problems with counterfeiting, which is also something cryptocurrencies completely solve.
}

This problem, of how to transfer ownership of a code, is really the same double spending problem that cryptocurrencies ◊link[double-spending]{pioneered a solution} for. And tokens inherit this property, allowing you to buy a token based gift card and be absolutely sure that it's unspent and that you're the only one who can spend it.

◊note-pos[#:top -11]{verify}



◊subhead{Derivatives}

It's quite difficult for us humans to truly understand very big numbers, because we don't have anything to relate them to. For example, what's the difference between $1 billion and $1 trillion? I know that the latter is 1000 times more, but that's just a number and I have difficulties to truly understand how large the difference is.

I think visualizations can help us compare large amounts like these, so here's one where the small box ◊|money-vis-small| corresponds to $100 billion and the big box ◊|money-vis-big| corresponds to $1 trillion. (Although they may look small, the amounts are still ◊em{huge}.)

◊div[#:class "money-visualization"]{

    ◊(small-img "Jeff Bezos" "/images/markets/small.png")◊mn[#:top -3]{bezos}

    ◊(market-img "Gold" "/images/markets/gold.png")◊mn[#:top -4]{gold}

    ◊(market-img "Money" "/images/markets/money.png")◊mn[#:top -5]{money}

    ◊(market-img "Derivatives" "/images/markets/derivatives.png")◊mn[#:top -22]{derivatives}

    ◊(small-img "Bitcoin" "/images/markets/small.png")◊mn[#:top -5]{bitcoin}
}

◊ndef["bezos"]{
    Jeff Bezos, ◊link[richest-men]{the richest man in the world}, is worth a staggering ◊strong{$117.5 billion}. (2019)
}

◊ndef["gold"]{
    ◊link[mined-gold]{Around 190,040 tonnes of gold} has been mined in the world. At a ◊link[gold-price]{spot price} of $1,582.30/oz, or $50,872.09/kg, it would be worth around ◊strong{$9.7 trillion}. (2020-01-28)
}

◊ndef["money"]{
    All the money in the world, both physical and digital locked up with banks, is worth around ◊strong{$90 trillion}. ◊|visualcapitalist-ref|
}

◊ndef["derivatives"]{
    It's quite difficult to pinpoint the value of derivatives correctly. I've found a low end estimate at ◊strong{$544 trillion} and a high end at ◊strong{$1.2 quadrillion} (or $1,200 trillion). ◊|visualcapitalist-ref|

    One quadrillion!  As a non-native English speaker I hadn't even encountered "quadrillion" before, and to me it sounds like a made-up number found in Donald Duck.
}

◊ndef["bitcoin"]{
    There's been a lot of excitement around Bitcoin's meteoric rise in valuation. But compared to the really big markets ◊link[coinlib]{Bitcoin's marketcap} of ◊strong{$164 billion} isn't that impressive. (2020-01-28)
}

◊(define money-vis-small
  `(span ((class "money-vis-small"))))
◊(define money-vis-big
  `(span ((class "money-vis-big"))))

◊(define (market-img title src)
   `(div ((class "block"))
      (div ((class "title")) ,title)
      (div ((class "wrapper"))
        (img ((src ,src))))))
◊(define (small-img title src)
   `(div ((class "block"))
      (div ((class "title")) ,title)
      (div ((class "wrapper small"))
        (img ((src ,src))))))


◊; Extremely difficult to this with text, as fonts/sizes looks very different.
◊; But it's easy to generate a template with code.
◊;◊div[#:class "money-visualization"]{
    ◊;◊gen[117.5 #:cols 10 #:type "person"]{Jeff Bezos}
    ◊;◊gen[9700 #:cols 3 #:type "gold"]{Gold}
    ◊;Stocks:
    ◊;(gen 73000 #:cols 13)
    ◊;◊gen[90000 #:cols 14 #:type "money"]{All the money in the world}
    ◊;◊gen[1200000 #:cols 38 #:type "derivatives"]{Derivatives}
    ◊;◊gen[164 #:cols 10 #:type "bitcoin"]{Bitcoin}
◊;}

◊;I highly recommend you to check out the excellent ◊link[money-visualization]{visualization by visualcapitalist}, which this visualization is inspired by.

I bring this up just to say one thing: the value of derivatives is absolutely huge. Money, which makes the world go around, is dwarfed by the value of derivatives.

But ◊link[derivative]{what are derivatives}?

In short, they're a bet on the value of something. A derivative is a contract that derives its price from fluctuations of the underlying asset. This commonly include bets on stocks, bonds, currencies and commodities. Have you heard about futures, forwards, swaps and options? They're all different types of derivatives.

We've already seen how cryptocurrencies can improve currencies, but other types of derivatives might also find some benefit from being based on cryptocurrency tokens.

Take stock trading, for example. They're done through a stock exchange and intermediaries that manage the exchange. This is required because---like the problem with gift cards---there's no way to transfer ownership in a secure way. But now there is; with tokens you could create a decentralized derivative market and trade them directly between two people, without the need for an intermediary to manage the trade.◊mn{save-money}

If you wanted to, you could also create digital ◊link[bearer-share]{bearer shares}, where the share of a security is given to whoever controls a specific token. (With typical bearer shares control is given to whoever holds a certain piece of paper.) They would protect the owners' anonymity, since their identity is never recorded or required, and could be used to for example create a company controlled by anonymous people.

I'm not suggesting that all derivatives should just use tokens, in many cases this wouldn't make sense and would only add inefficiencies to the system. But even if there's just a very small fraction of derivatives that could benefit, due to the sheer size of the derivative market, tokens could still bring a lot of value.


◊ndef["save-money"]{
    Similar to how cryptocurrencies can save fees by cutting out payment processors from digital purchases, there's financial gain here too.
}


◊ndef["bearer-shares"]{
    Tokens allow you to create digital ◊link[bearer-share]{bearer shares}, where the share of a security is given to whoever controls a specific token. They would protect the owners' anonymity, since their identity is never recorded or required, and could be used to for example create a company controlled by anonymous people.
}


◊(define derivative
   (x-ref
     "2020-02-07"
     "https://www.investopedia.com/terms/d/derivative.asp"
     "James Chen: Derivative"))
◊(define richest-men
   (x-ref
     "2020-02-07"
     "https://wealthygorilla.com/top-20-richest-people-world/"
     "Dan Western (2020) The 25 Richest People in the World 2020"))
◊(define bearer-share
   (x-ref
     "2020-02-07"
     "https://www.investopedia.com/terms/b/bearer_share.asp"
     "James Chen: Bearer Share"))
◊(define money-visualization
   (x-ref
     "2020-02-07"
     "https://money.visualcapitalist.com/worlds-money-markets-one-visualization-2017/"
     "All of the World’s Money and Markets in One Visualization"))
◊(define biggest-companies
   (x-ref
     "2020-02-07"
     "https://www.forbes.com/global2000/list/#header:marketValue_sortreverse:true"
     "The World’s Largest Public Companies"))
◊(define gold-price
   (x-ref
     "2020-02-07"
     "https://www.apmex.com/gold-price"
     "APMEX: Live USD Gold Price Charts & Historical Data"))
◊(define mined-gold
   (x-ref
     "2020-02-07"
     "https://www.gold.org/about-gold/gold-supply/gold-mining/how-much-gold"
     "World Gold Council: How much gold has been mined?"))
◊(define coinlib
   (x-ref
     "2020-02-07"
     "https://coinlib.io/"
     "Coinlib - Crypto Prices, Charts, Lists & Crypto Market News"))

◊(define visualcapitalist-ref
  (nbsp "(" (link money-visualization (nbsp "Visualcapitalist 2017") ")")))

◊;Jeff Bezos: $117.5 billion
◊;Bitcoin marketcap: $150 billion
◊; Apple market value $961.3 B
◊;Currencies: $7.6 trillion (2017, visualcapitalist)
◊;Gold: 187,200 tons, $1,582.30 USD spot price/oz ($50,872.09/kg) => $9.5 trillion
◊;Stock markets: $73 trillion (2017, visualcapitalist)
◊;All the money: $90.4 trillion (2017, visualcapitalist)
◊;Derivatives: $544 trillion--$1.2 quadrillion (2017, visualcapitalist)

◊(define bigbox-char "■")
◊(define smallbox-char "◾")
◊;(define box-char "▣")
◊;(define box-char "◼")
◊;(define box-char "◾")
◊(define bigbox-val 1000)
◊(define smallbox-val 100)

◊(define (big-box)
  `(span ((class "money-vis big")) ,bigbox-char))
◊(define (small-box)
  `(span ((class "money-vis small")) ,smallbox-char))
◊(define (inline-big-box)
  `(span ((class "inline-ex"))
     ,(big-box)))
◊(define (inline-small-box)
  `(span ((class "inline-ex"))
     ,(small-box)))

◊(define (gen billions #:cols cols #:type type . args)

   (define rows (round (/ billions (* bigbox-val cols))))
   (define extra (- billions (* cols rows bigbox-val)))

   (define (gen-rows value)
     (if (<= value smallbox-val)
       `()
       (let* ((row-value (min value (* cols bigbox-val)))
              (rest-value (- value row-value)))
       (cons
         `(div ((class "row"))
           ,@(gen-boxes row-value))
         (gen-rows rest-value)))))

   (define (gen-row value)
     `(div ((class "row"))
        ,@(gen-boxes value)))

   (define (gen-boxes value)
     (cond
       [(>= value bigbox-val)
        (cons (big-box)
          (gen-boxes (- value bigbox-val)))]
       [(>= value smallbox-val)
        (cons (small-box)
          (gen-boxes (- value smallbox-val)))]
       [else
        `()]))

   (define (box-list span-class char box-val value)
     (if (>= value box-val)
        (cons `(span ((class ,span-class)) ,char)
              (box-list span-class char box-val (- value box-val)))
        `()))

   `(div ((class ,(string-append "block " type)))
      (div ((class "title")) ,@args)
      ,@(reverse (gen-rows billions))))